Doubling Charitable Impact: Stock Donation Strategy Boosts Giving

Doubling Charitable Impact: Stock Donation Strategy Boosts Giving

Executive Summary

Many individuals desire to increase their charitable giving but face constraints due to income limitations and cash flow concerns. Legacy Bridge Advisors addressed this challenge for one client by implementing a strategic stock donation to a donor-advised fund. By donating appreciated stock, the client avoided significant capital gains taxes and received a substantial income tax deduction, effectively doubling their capacity for charitable contributions. This case study demonstrates the power of strategic financial planning in maximizing charitable impact.

The Challenge

Sarah Miller, a 62-year-old entrepreneur and long-time client of Legacy Bridge Advisors, expressed a strong desire to significantly increase her annual charitable giving. Sarah had been contributing $25,000 annually to various charities, primarily through cash donations. However, with a growing portfolio and increasing tax liabilities, she felt limited by her current capacity. Her annual income, after business expenses, was roughly $300,000, placing her in a high tax bracket. Sarah also owned a significant amount of stock in a publicly traded tech company, purchased several years prior for $50,000, which had appreciated substantially to $250,000.

The challenge was two-fold: first, to increase Sarah's charitable giving without negatively impacting her current cash flow and lifestyle. Second, to find a tax-efficient way to manage the substantial capital gains exposure from her highly appreciated stock. Selling the stock outright would trigger a significant capital gains tax liability, estimated at $30,000 (20% federal tax rate on $200,000 gain + 3.8% net investment income tax), reducing the amount available for charitable giving. Sarah expressed a desire to ultimately donate $50,000 annually, double her current giving level, while minimizing the tax impact.

Furthermore, Sarah was concerned about the administrative burden of managing multiple charitable donations and tracking receipts for tax purposes. She sought a simplified and streamlined approach to her philanthropic endeavors.

The Approach

Legacy Bridge Advisors recommended a strategy centered around donating the highly appreciated stock to a donor-advised fund (DAF). This approach addressed Sarah's desire to increase her charitable impact while simultaneously minimizing her tax burden. The strategic thinking behind this recommendation was based on several key principles:

• Tax Avoidance: Donating appreciated stock directly to a qualified charity or DAF allows the donor to avoid paying capital gains taxes on the appreciation. In Sarah's case, this meant avoiding the $30,000 in capital gains tax that would have been incurred if she had sold the stock.
• Income Tax Deduction: The donor receives an income tax deduction for the fair market value of the donated stock, up to 30% of their adjusted gross income (AGI). This deduction can significantly reduce the donor's overall tax liability for the year.
• Simplified Giving: A DAF acts as a charitable investment account, allowing the donor to make a single, large donation and then distribute grants to various charities over time. This simplifies the administrative burden of managing multiple donations and tracking receipts.
• Investment Growth: The assets within the DAF can be invested and grow tax-free, further increasing the potential for future charitable giving.

The decision framework involved a thorough analysis of Sarah's financial situation, including her income, assets, and tax bracket. Legacy Bridge Advisors also considered her philanthropic goals and preferences. The team then modeled different scenarios to determine the optimal amount of stock to donate to maximize the tax benefits and achieve her desired giving level. We also discussed with Sarah the importance of rebalancing her portfolio after the stock donation to maintain a diversified asset allocation. This conversation covered the potential need to purchase similar tech stocks or diversify into different sectors to maintain her desired risk profile.

Technical Implementation

The technical implementation involved several key steps:

1. Stock Transfer: Legacy Bridge Advisors facilitated the transfer of $100,000 worth of Sarah's appreciated tech stock (400 shares based on a market price of $250/share) from her brokerage account at Charles Schwab to a donor-advised fund at Fidelity Charitable. This transfer was executed electronically through Schwab's established procedures for gifting securities. The selection of Fidelity Charitable was based on its low administrative fees, broad investment options, and user-friendly online platform. We ensured that all required documentation was properly completed and submitted to both Schwab and Fidelity Charitable.

2. DAF Establishment: Legacy Bridge Advisors guided Sarah through the process of establishing her donor-advised fund at Fidelity Charitable. This involved completing the online application, selecting an investment strategy for the DAF assets (a diversified portfolio of low-cost index funds), and designating the initial beneficiaries (i.e., the charities she planned to support).

3. Tax Calculation: Legacy Bridge Advisors prepared a detailed tax analysis demonstrating the impact of the stock donation on Sarah's overall tax liability. This analysis included calculating the income tax deduction she would receive (up to 30% of her AGI), the capital gains taxes she would avoid, and the net tax savings. We used tax preparation software to model different scenarios and ensure accuracy. The projected income tax deduction was $90,000 (30% of Sarah's $300,000 AGI). Because the donation was $100,000, she could carry the extra $10,000 deduction into future years.

4. Grant Recommendation: Legacy Bridge Advisors assisted Sarah in developing a grant recommendation strategy for her DAF. This involved identifying the charities she wanted to support and determining the amount of each grant. Sarah initially allocated $50,000 for immediate distribution to her chosen charities and planned to distribute the remaining funds over the next two years, maximizing the impact of her giving and the tax benefits derived from the carry-forward deduction.

5. Portfolio Rebalancing: Following the stock donation, Sarah's overall portfolio was rebalanced to maintain her desired asset allocation. This involved adjusting other investments to compensate for the reduction in her tech stock holdings. Legacy Bridge Advisors conducted a thorough review of her portfolio and made recommendations to ensure it remained aligned with her long-term financial goals.

Results & ROI

The implementation of the stock donation strategy yielded significant results for Sarah:

• Doubled Charitable Giving: Sarah was able to immediately double her annual charitable giving from $25,000 to $50,000 without impacting her cash flow.
• Capital Gains Tax Savings: She avoided $30,000 in capital gains taxes by donating the appreciated stock directly to the DAF.
• Income Tax Deduction: She received an income tax deduction of $90,000, reducing her overall tax liability by approximately $22,500 (assuming a 25% effective tax rate). She can carry the remaining $10,000 deduction forward to future years.
• Simplified Giving: The DAF streamlined her charitable giving process, eliminating the administrative burden of managing multiple donations and tracking receipts.
• Tax-Free Growth: The assets within her DAF are growing tax-free, providing the potential for future charitable giving.
• Total Financial Benefit: The total financial benefit realized by Sarah in the first year was approximately $52,500 ($30,000 capital gains tax savings + $22,500 income tax reduction). This doesn't include the benefit from the future carry-forward deduction. This demonstrates the significant financial advantages of strategic charitable giving.

The results demonstrate a clear and quantifiable return on investment for implementing a stock donation strategy. By leveraging the tax benefits associated with charitable giving, Sarah was able to significantly increase her philanthropic impact while simultaneously reducing her tax burden.

Key Takeaways

1. Appreciated Stock as a Powerful Giving Tool: Donating appreciated stock is a highly effective way to increase charitable giving while minimizing taxes. Advisors should proactively identify clients who hold appreciated assets and discuss the potential benefits of this strategy.

2. Donor-Advised Funds Streamline Giving: DAFs provide a convenient and efficient way to manage charitable donations, simplifying the administrative burden for both the donor and the advisor.

3. Tax Planning is Integral to Financial Planning: Charitable giving should be integrated into the overall financial planning process, taking into account the client's tax situation and philanthropic goals.

4. Educate Clients on Carry-Forward Provisions: Ensure clients are aware of the ability to carry forward excess charitable deductions to future tax years, maximizing the tax benefits of their giving.

5. Model Scenarios and Demonstrate Impact: Use financial modeling tools to illustrate the potential tax savings and increased giving capacity that can be achieved through strategic charitable planning. This helps clients visualize the benefits and make informed decisions.

About Golden Door Asset

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